The microcredit concept is based on the idea that a small loan to an individual, family or community in the developing world can kick-start a business, allowing the loan recipient to become a self-reliant economic actor; in time, the loan will be paid back, with a modicum of interest, thereby enabling the microcredit institution -- generally an NGO -- to underwrite another start-up. While there is some debate about the potential of microloans to affect the lives of the very poor, the concept is generally considered to be a success. Microcredit NGOs have a goal of reaching 100 million people by the end of this year.

But the notion of do-good institutions doling out money to recipients has something of a 20th century character. While there are open-source models for microfinance, they generally seem to be intended to assist the creation of more microcredit NGOs. A new microfinance group, Kiva, intends to take a different course: they've built the world's first peer-to-peer, distributed microloan website.

Kiva's first country of focus is Uganda, where the Internet is available even in poor rural areas. Lenders may loan money through kiva.org, which lists businesses in need of funding and provides background on the entrepreneur starting the enterprise. Individuals may makes loans in increments as small as $25, and can expect to receive repayment, without interest, at the end of the loan term, which typically runs between six and 12 months. Since Kiva's source of capital is charitably-minded individuals, it is able to provide more flexible loan terms than traditional financial institutions.

To date Kiva has funded 13 small enterprises in Uganda, including a livestock business, a medicine shop, several produce businesses, a fish monger and a clothing reseller. Two of the entrepreneurs have already repaid their loans in full. The enterprises Kiva is working with are asking for loans averaging $500, and the average lender is loaning between $25 and $100.

Kiva was founded by Matthew and Jessica Flannery, a California couple who have lived in central Africa; Jessica Flannery worked for the Village Enterprise Fund, a non-profit which has granted seed money to Kiva. They argue that a one-to-one process is inherently more transparent than contributing to a charity or NGO, which then redistributes the donations; just as important, making a direct microloan gives the lender a greater sense of engagement than would an indirect donation. Individual lenders can select precisely which business receives the loan, and will in turn receive regular updates on the start-up's progress:

Throughout the duration of loan repayment, as a lender, you will be sent regular (usually every month) email updates about the progress of your sponsored business' progress. Updates include things like: information on loan repayment progress; photos of the entrepreneur and perhaps the new capital equipment they've been able to purchase because of the loan; narratives on business growth; anecdotes about the entrepreneur's family improving their standard of living; news about local seasons or current events that might affect your sponsored business; and more. Content comes from our staff as well as from the recipients themselves (via our staff ).

Remember, these are loans, not charitable donations. 100% of the loan amount goes to the selected business; so far, no businesses have defaulted on their credit. Because these are loans, the "same" money can have a socially beneficial effect over and over again. A $50 loan, once repaid, can be immediately loaned out again, helping another start-up. Over time, multiple new businesses can receive microcredit support from a single initial loan.

This does mean that lenders do not receive any sort of tax break for the money. Moreover, the Kiva model requires more active participation in the lending process than does a simple donation to Grameen or Opportunity International. But this, to me, is Kiva's key strength: lenders aren't just passive sources of money, they're active participants in the microcredit process.

Too often, the charity and NGO system is disempowering for both the recipients of support and those who donate their time and money. The original microfinance model helped to answer part of that complaint, as it explicitly offered support for people who sought to build new businesses. The Kiva peer-to-peer microfinance model may be an answer to the other part, by giving the lenders an active role in the strengthening of global communities.

Wow. This has the opportunity to change those giving the money too and go beyond cheque book activism.

How long until those who received loans will be able to sponsor other businesses I wonder?

Finally, anyone else wonder if this couldn't be used in the "developed" world?

Posted by: Daniel Haran on 21 Oct 05

I suppose that, in principle, it could also be used in the "developed" world, but one reason why it's such an appealing model is the differential value of money. $500 in the US is nowhere near close enough to start up a company, whereas in Uganda it's a solid investment. A small number of lenders in the US and Europe, each offering loans more or less equivalent to the money in their pockets, could have a rapid, profound effect on the lives of people in the developing world -- and be nothing more than a drop in the bucket for people in the West.

The one-to-one approach is certainly interesting, but claiming that this isn't charity is a bit too far. The absence of the obligation to pay interest on the money comes down to charity. It's direct charity, but still charity.

By the way, check out the "minipreneurs" of Zopa, a website where ordinary people lend and borrow money off each other:

Zopa has 26,000 members, 35% of whom are lenders. They have about £3 million to lend. So far most loans are for between £2000 and £5000 and the average rate of return for the lenders has been 7.6%. Trendwatching.com's researchers are impressed with Zopa. "Consumers turning into bankers," they say. "How's that for minipreneurism?"

Kiva.org is simply brilliant. Peer-to-peer model, verified parties, safe payment method, accepting partial loan amounts - it can't get better than this. I discovered worldchanging a few months ago and it is neck to neck with google in my mindspace. The likes of kiva.org is what makes worldchanging.com so compelling. Thanks to everyone who makes it happen.

Kiva $ amounts are chump change for a lot of folks and if that is going to change lives for the better, then let's go!

Posted by: Subbarao Seethamsetty on 22 Oct 05

I have to admit I hadn't thought about Kiva in the p2p stance or the way it eases raising capital for a bank. The journal's idea originally struck me as sponsor an African-ish similar to the dollar a day campaign, but might be useful in the way it lets you communicate with the loaner. after all experienced farmers in the u.s. might be able to help their loan-ee get into European and American organic food chains or other distrubtion networks.

after all experienced farmers in the u.s. might be able to help their loan-ee get into European and American organic food chains or other distrubtion networks.

Hold on, the loans are never going to pay for the construction of roads, railroads, river barges, trucks, cool storage facilities, airports and airplanes.

It's a good system for small local enterprises. But the real problem for most African farmers is lack of infrastructure to get their produce to wider markets. Even if they get good education on new farming techniques, good irrigation gear, and good fertilisers, even then, they won't get their products to market. The Big Strong State with Big Strong Billions is needed here to build infrastructures.

Posted by: Lorenzo on 23 Oct 05

I was in on the original post(http://www.nextbillion.net/activitycapsule/1547)- it's cool that it's spawning such a good discussion.

*Quick aside to Lorenzo: although loaners never receive interest, Kiva does charge interest from loan recipients. This is how they cover their admin costs.
*Also: Thanks for the Zopa link. I hadn't heard of it--it's pretty amazing!

*Subbarao, I agree with your "p2p" characterization. Kiva's genius is that it conforms to the format that the Internet generation is used to--providing easy access to specs, tools to compare your loan-ees, no overhead or transactions costs, and payments via Paypal. The way you receive constant feedback from your loan-ee is reminiscent of nurturing a Tamagotchi (That's a crude comparison for the sake of extending the Internet generation metaphor).

...I would guess that our parents might be less attracted to this model, because they are used to contributing charitable donations to an organization that does all the selections and distribution itself.

No, these $25 loans won't pay for roads, storage and airplanes, but they might empower enough people to create the expectation for such services. They might introduce the idea of making charitable donations to a new generation, and they might create a new standard for transparency and affordability.